Days before Bank of America shareholders approved the bank’s $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies’ earnings in the years to come. But shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.

What Bank of America’s top executives, including its chief executive then, Kenneth D Lewis, knew about Merrill’s vast mortgage losses and when they knew it emerged in court documents filed Sunday evening in a shareholder lawsuit being heard in Federal District Court in Manhattan.

The disclosure, coming to light in private litigation, is likely to reignite concerns that federal regulators and prosecutors have not worked hard enough to hold key executives accountable for their actions during the financial crisis.

The filing in the shareholder suit included sworn testimony from Lewis in which he concedes that before Bank of America stockholders voted to approve the deal he had received loss estimates relating to the Merrill deal that were far greater than reflected in the figures that had appeared in the proxy documents filed with regulators. Shareholders rely on statements made in proxy filings to decide whether to approve transactions their companies have proposed, and companies must disclose all facts that could be meaningful for shareholders trying to decide how to vote on a deal.

The bank’s purchase of Merrill, struck during the depths of the financial crisis, was the culmination of an acquisition binge by Lewis that transformed Bank of America from its base in North Carolina into a financial behemoth that could compete head-to-head with the biggest institutions on Wall Street.

But the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch, also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.

Bank of America officials declined to comment. Andrew J Ceresney, a lawyer for Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary.

In a deposition taken on March 27 of this year, Lewis discussed the tumultuous period between the announcement of the merger in September 2008 and the shareholders’ vote on the deal on Dec 5, 2008.

The suit, filed on behalf of Bank of America shareholders, asserts that the bank’s executives misled them by not disclosing Merrill’s mounting mortgage losses in proxy documents recommending approval of the deal.

For example, the proxy statement estimated that the purchase of Merrill Lynch would reduce earnings by only 3 per cent in 2009, would not hurt the bank’s profits in 2010 and might actually add a bit to them.

Lewis echoed this view at the meeting where shareholders voted on the deal. When asked whether the transaction would dilute Bank of America’s earnings in coming years or add to its income, he referred the questioner to the proxy statement.

But in sworn testimony taken in the case, Lewis testified that by the time shareholders voted, the merger’s effect on Bank of America’s profit outlook had changed. According to the court filing, Lewis confirmed that the bank “expected the merger to be more than 13 per cent dilutive in 2009 and 2.8 per cent dilutive in 2010.”

Asked by Steven B. Singer, a lawyer at Bernstein Litowitz Berger & Grossmann who represents the plaintiffs, whether the figures shareholders had received in the proxy statement were no longer accurate on the date of the merger vote, Lewis said: “They were not those numbers, no.”

Singer declined to comment on the filing. But the document submitted to the court said that Lewis’s “sworn admissions leave no genuine dispute that his statement at the December 5 shareholder meeting reiterating the bank’s prior accretion and dilution calculations was materially false when made.”

Lewis himself is a defendant in the suit, as are Bank of America board members who recommended that shareholders approve the Merrill merger.

E-mail messages uncovered in the litigation show that Merrill’s losses had severely damaged its financial position before the shareholder vote. Indeed, the court filing notes, by Nov 26, the bank ordered Merrill to liquidate hundreds of billions of dollars in assets. These asset sales significantly reduced the combined companies’ future earnings power by at least $1 billion a year, Jeffrey J Brown, the bank’s former treasurer, testified.

On Dec 3, two days before the vote, Lewis met with top executives of the bank and the investment firm to assess Merrill’s fourth-quarter losses, the filing says. Both companies determined that the loss for the period would be $14 billion before tax, or $9 billion after tax. Shortly after the meeting, Brown urged Joe L. Price, Bank of America’s chief financial officer at the time, to disclose Merrill’s losses, given their size, the filing said. When Brown received resistance, he warned Price that the failure to disclose “could be a criminal offense, stating that he did not want to be ‘talking through a glass wall over a telephone’ if no disclosure was made,” the filing noted. A lawyer for Price did not immediately respond to an e-mail request seeking comment Sunday night.

Merrill’s problems also forced Bank of America to raise $9 billion in a debt offering just days before its shareholders were to vote on the deal, the court filing shows. In an e-mail sent on Dec 4, 2008, Brown told senior Bank of America executives that this and other debt offerings were the result of Merrill’s haemorrhaging, and worsened the “dilution impacts” of the merger. “It hurts your #s, I know,” he wrote, the filing shows. “But this is real,” he added, “and should be associated with the transaction.”

Two business days after Bank of America shareholders approved the deal, the bank’s board met and received details of the $14 billion pretax fourth-quarter loss. The board also learned that the deal would be far more damaging to the bank’s earnings than had been publicly disclosed.

One bank executive attending that meeting was Timothy Mayopoulos, then Bank of America’s general counsel. In testimony noted in the court filing, Mayopoulos expressed surprise at the size of the loss, which he said he had not been told about. He testified that he tried to speak with Price about possibly disclosing the losses but that Price was not available.

The next day, the filing noted, Mayopoulos was “fired without explanation and immediately escorted from the premises, without being given the opportunity to collect his personal belongings.”

On Jan. 1, 2009, Lewis announced the completion of the Merrill deal. “We created this new organisation because we believe that wealth management and corporate and investment banking represent significant growth opportunities, especially when combined with our leading capabilities in consumer and commercial banking,” he said. “We are now uniquely positioned to win market share and expand our leadership position in markets around the world.”

Merrill has more recently made positive contributions to Bank of America’s bottom line, but just weeks after Lewis’s announcement, when Merrill’s staggering fourth-quarter losses were disclosed along with the taxpayer bailout, Bank of America’s shares lost more than half of their value in four trading days. Shareholders lost roughly $50 billion in market value.

BofA withheld Merrill losses before deal

Shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 bn

Days before Bank of America shareholders approved the bank’s $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies’ earnings in the years to come.

Days before Bank of America shareholders approved the bank’s $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies’ earnings in the years to come. But shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.

What Bank of America’s top executives, including its chief executive then, Kenneth D Lewis, knew about Merrill’s vast mortgage losses and when they knew it emerged in court documents filed Sunday evening in a shareholder lawsuit being heard in Federal District Court in Manhattan.

The disclosure, coming to light in private litigation, is likely to reignite concerns that federal regulators and prosecutors have not worked hard enough to hold key executives accountable for their actions during the financial crisis.

The filing in the shareholder suit included sworn testimony from Lewis in which he concedes that before Bank of America stockholders voted to approve the deal he had received loss estimates relating to the Merrill deal that were far greater than reflected in the figures that had appeared in the proxy documents filed with regulators. Shareholders rely on statements made in proxy filings to decide whether to approve transactions their companies have proposed, and companies must disclose all facts that could be meaningful for shareholders trying to decide how to vote on a deal.

The bank’s purchase of Merrill, struck during the depths of the financial crisis, was the culmination of an acquisition binge by Lewis that transformed Bank of America from its base in North Carolina into a financial behemoth that could compete head-to-head with the biggest institutions on Wall Street.

But the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch, also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.

Bank of America officials declined to comment. Andrew J Ceresney, a lawyer for Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary.

In a deposition taken on March 27 of this year, Lewis discussed the tumultuous period between the announcement of the merger in September 2008 and the shareholders’ vote on the deal on Dec 5, 2008.

The suit, filed on behalf of Bank of America shareholders, asserts that the bank’s executives misled them by not disclosing Merrill’s mounting mortgage losses in proxy documents recommending approval of the deal.

For example, the proxy statement estimated that the purchase of Merrill Lynch would reduce earnings by only 3 per cent in 2009, would not hurt the bank’s profits in 2010 and might actually add a bit to them.

Lewis echoed this view at the meeting where shareholders voted on the deal. When asked whether the transaction would dilute Bank of America’s earnings in coming years or add to its income, he referred the questioner to the proxy statement.

But in sworn testimony taken in the case, Lewis testified that by the time shareholders voted, the merger’s effect on Bank of America’s profit outlook had changed. According to the court filing, Lewis confirmed that the bank “expected the merger to be more than 13 per cent dilutive in 2009 and 2.8 per cent dilutive in 2010.”

Asked by Steven B. Singer, a lawyer at Bernstein Litowitz Berger & Grossmann who represents the plaintiffs, whether the figures shareholders had received in the proxy statement were no longer accurate on the date of the merger vote, Lewis said: “They were not those numbers, no.”

Singer declined to comment on the filing. But the document submitted to the court said that Lewis’s “sworn admissions leave no genuine dispute that his statement at the December 5 shareholder meeting reiterating the bank’s prior accretion and dilution calculations was materially false when made.”

Lewis himself is a defendant in the suit, as are Bank of America board members who recommended that shareholders approve the Merrill merger.

E-mail messages uncovered in the litigation show that Merrill’s losses had severely damaged its financial position before the shareholder vote. Indeed, the court filing notes, by Nov 26, the bank ordered Merrill to liquidate hundreds of billions of dollars in assets. These asset sales significantly reduced the combined companies’ future earnings power by at least $1 billion a year, Jeffrey J Brown, the bank’s former treasurer, testified.

On Dec 3, two days before the vote, Lewis met with top executives of the bank and the investment firm to assess Merrill’s fourth-quarter losses, the filing says. Both companies determined that the loss for the period would be $14 billion before tax, or $9 billion after tax. Shortly after the meeting, Brown urged Joe L. Price, Bank of America’s chief financial officer at the time, to disclose Merrill’s losses, given their size, the filing said. When Brown received resistance, he warned Price that the failure to disclose “could be a criminal offense, stating that he did not want to be ‘talking through a glass wall over a telephone’ if no disclosure was made,” the filing noted. A lawyer for Price did not immediately respond to an e-mail request seeking comment Sunday night.

Merrill’s problems also forced Bank of America to raise $9 billion in a debt offering just days before its shareholders were to vote on the deal, the court filing shows. In an e-mail sent on Dec 4, 2008, Brown told senior Bank of America executives that this and other debt offerings were the result of Merrill’s haemorrhaging, and worsened the “dilution impacts” of the merger. “It hurts your #s, I know,” he wrote, the filing shows. “But this is real,” he added, “and should be associated with the transaction.”

Two business days after Bank of America shareholders approved the deal, the bank’s board met and received details of the $14 billion pretax fourth-quarter loss. The board also learned that the deal would be far more damaging to the bank’s earnings than had been publicly disclosed.

One bank executive attending that meeting was Timothy Mayopoulos, then Bank of America’s general counsel. In testimony noted in the court filing, Mayopoulos expressed surprise at the size of the loss, which he said he had not been told about. He testified that he tried to speak with Price about possibly disclosing the losses but that Price was not available.

The next day, the filing noted, Mayopoulos was “fired without explanation and immediately escorted from the premises, without being given the opportunity to collect his personal belongings.”

On Jan. 1, 2009, Lewis announced the completion of the Merrill deal. “We created this new organisation because we believe that wealth management and corporate and investment banking represent significant growth opportunities, especially when combined with our leading capabilities in consumer and commercial banking,” he said. “We are now uniquely positioned to win market share and expand our leadership position in markets around the world.”

Merrill has more recently made positive contributions to Bank of America’s bottom line, but just weeks after Lewis’s announcement, when Merrill’s staggering fourth-quarter losses were disclosed along with the taxpayer bailout, Bank of America’s shares lost more than half of their value in four trading days. Shareholders lost roughly $50 billion in market value.